Digital technology, green finance in vogue among fashion’s sustainability trendsetters
Wed, 08/05/2020 – 01:00
The key to long-term success in the fashion industry is to start trends and continually push the envelope — a philosophy that also applies to its ESG priorities.
The $2.5 trillion industry accounts for about 8 percent of the world’s carbon emissions when considering the entire value chain — higher than the entire iron and steel manufacturing industry combined, for comparison. Without any intervention, that figure is projected to increase more than 60 percent by 2030. However, there is a growing and collective awareness of environmental impact across the industry. Companies are discovering sustainability is not just a fad, but a new standard that is here to stay.
A proliferation of greening initiatives from industry players has emerged with public announcements of policies to tackle this issue, measures to address their supply chain footprints, promotion of circular economy practices and encouragement for sustainable brands growing increasingly popular. However, despite these various green initiatives from several early trendsetters in the fashion industry, formidable challenges lay ahead on the path to scaling up sustainability — especially when it comes to supply chain strategies.
The lack of environmental impact information and outdated technology are two ubiquitous issues plaguing industrial supply chains in general, but they are especially significant in the context of the fashion industry.
Due to highly price-competitive environments, upstream supply chain participants have little motivation to invest in improvements. Downstream supply chain participants that rarely have a personal stake, such as powerful brands and retailers, hardly encourage prioritization of sustainability upstream. These dynamics have led to the development of stagnant supply chains largely unable to respond to the urgency of the fashion industry’s significant carbon footprint.
Given that most emissions are produced along the supply chain, companies’ inability to monitor and track this data means that there is not a starting point to begin improving their environmental footprints.
In particular, inadequate data collection infrastructure along the supply chain has resulted in a shortage of environmental data and information transparency. According to the 2020 Fashion Transparency Index survey, while 78 percent of brands have policies on energy and carbon emissions, only 16 percent publish data on the annual carbon footprints of their supply chain. Given that most emissions are produced along the supply chain, companies’ inability to monitor and track this data means that there is not a starting point to begin improving their environmental footprints.
The reluctance to upgrade to new technology can be partly attributed to thin operating margins of fashion supply chains leading to inefficiencies along the entire chain. One of the most candid illustrations of inefficiencies caused by antiquated technology is in the manufacturing process, where conventional practices still take 2,700 liters — or three years’ worth of drinking water — to make a typical cotton T-shirt.
Traditional manufacturers abide by the “if it ain’t broke, don’t fix it” adage, while the ultimate retailer of the shirt has no direct ties to the manufacturer. Thus even if the manufacturer had a sustainability policy, it would be difficult to enforce. When both upstream and downstream participants of the supply chain are at odds with modernization, it prevents the changes needed to respond to the climate impact of the industry.
But it is not all doom and gloom. This is where green finance and technology come in. Their dual adoption can begin to address the environmental data gaps and also boost efficiency for production processes in the supply chain that would usher along a much-needed evolution of the fashion industry towards greater sustainability.
Digital technology will play a pivotal role in addressing information transparency and environmental reporting in the fashion industry by facilitating data collection along the supply chain. Using blockchain and cloud-based technology, a number of startups are already laying the groundwork.
For example, blockchain platform Provenance helps trace and certify supply chains to enable ethical procurement decisions. Another startup, Galaxius, offers a cloud-based system that tracks supply chain activity from fabric orders to garment delivery.
Beyond startups, fashion luxury giant Kering Group launched an app called My EP&L that tracks carbon emissions, water consumption and air and water pollution along its supply chain to educate designers and students on sustainable design principles. Recently, Stella McCartney and Google Cloud announced a partnership to determine the environmental impact of various types of raw materials. All of these efforts contribute to advancing data collection at different points along the supply chain and have the potential to provide unprecedented levels of transparency for the industry.
Dated technology in the production phase of the supply chain creates significant challenges in two ways. The first is in more eco-friendly product material innovation. New textiles, alternative raw materials and sustainable dyeing methods are made possible through scientific and technological ingenuity.
For example, Tencel, a super-absorbent fiber made from wood pulp, offers a great alternative to synthetic activewear. Lenzing Group, producer of Tencel, also uses a closed-loop production process and sustainable dyeing technology in which solvents needed to make the fiber are recycled over and over again to produce new fibers. But the higher costs associated with upgrading machinery to produce more eco-friendly materials typically associated with such innovations hinders their wider acceptance.
The second challenge relates to upgrades and updates to the supply chain that boost efficiency, promote better resource allocation, identify potential cost savings, predict demand and provide other benefits that mitigate the industry’s environmental impact.
Startups such as Optoro and ShareCloth use artificial intelligence, machine learning and other emerging technologies to digitize processes to lower excess inventory and reduce textile waste. However, similar to the cost barriers that impede wider adoption of eco-friendly materials, these new technologies depend on customized machinery or entirely new production facilities, which may be more capital-intensive and require considerable new capital expenditures when compared to traditional manufacturing processes.
Just digital technology for supply chain improvements will not be enough. Fashion will need green finance to drive large-scale transformation. The Boston Consulting Group estimates that commercializing and scaling these innovations will require $20 billion to $30 billion of financing per year.
The Boston Consulting Group estimates that commercializing and scaling these innovations will require $20 billion to $30 billion of financing per year.
Promising green finance developments in the fashion industry already are underway. Traditional lenders have begun to ink green bonds and sustainability-linked loans. In November, Prada became the first fashion company to sign a $59 million sustainability-linked loan with Crédit Agricole.
Under the terms of the loan, Prada can pay a reduced interest rate if it achieves targets related to the number of LEED Gold or Platinum-certified stores, the number of training hours employees receive, and the use of Prada Re-Nylon (regenerated nylon) in the production of goods. In February, VF Corporation closed its $591 million green bond, marking the first green bond issued in the industry.
Private equity investors are also paying attention to startup fashion brands. Just last year, The Carlyle Group made its first foray into the industry by acquiring a stake in Jeanologia, and Permira acquired a majority stake in the ethical fashion brand Reformation. In September 2019, the $30 million Good Fashion Fund launched, representing the first investment fund focused solely on driving the implementation of innovative solutions in the fashion industry.
Brands also have started to form corporate venture capital arms to create opportunities for green finance. Examples include Patagonia’s Tin Shed Ventures, launched as a $20 million fund in 2013, and H&M’s CO:LAB, which has made investments ranging from $1 million to $20 million in sustainable fashion.
Prada, by scaling and incentivizing its regenerated nylon technology through its green finance partnership with Credit Agricole, serves as a pioneer for the industry. However, the solutions offered by advancements in technology and green finance admittedly will need more buy-in from companies across the fashion world.
Some ideas that can move fashion in a greener direction include establishing long-term business strategies that incorporate plans for sustainable solutions, employing creative approaches to applying sustainability across supply chains and developing best practices for environmental data monitoring and reporting.
A recent press release from Google and WWF Sweden announcing plans to create an environmental data platform, the latest green financing deal by Moncler for up to $472 million that is tied to its environmental impact reduction targets and a similar arrangement by Salvatore Ferragamo for up to $295 million are welcome steps in the right direction, even in the midst of a global pandemic.
The future is indeed hopeful as sustainability continues to be championed across the industry and its supply chain. Green finance and digital technology will be increasingly critical drivers for the development of greener and more sustainable supply chains. The fashion industry always has been creative, innovative and bold in its designs; now is the time to channel these qualities to secure a fashionable future that is green and sustainable.
This article was adapted from the Paulson Institute’s three-part series on sustainability in the fashion industry.